The economics of micro-finance

This column is based on my trip to Hyderabad, earlier this year.  Here is part of the introduction:

Microfinance is not actually “micro” in scale. It is far more
organized than the individual moneylenders in poor communities, the
traditional source of finance. Spandana borrows from banks, has about
2,000 employees and deals with about 800,000 loan recipients. The
resulting economies of scale make possible lower interest rates.
Spandana has been lending at interest rates of 10 to 15 percent a year,
while other Indian microlenders may have rates ranging up to about 30
percent a year. Traditional moneylenders receive 5 or 10 percent a
month or more. It is no wonder that Spandana has grown.

seeks to earn a profit through higher repayment rates. Unlike the
moneylenders, Spandana lends to small groups of 5 to 10 people rather
than to individuals; each member is liable if other group borrowers do
not repay. The carrot is that good borrowers become eligible to receive
higher sums.

Yes I am a fan of micro-finance.  One overlooked benefit is that the weekly repayments enforce fiscal discipline and responsibility on the borrowing families.  Otherwise the money often goes to deadbeat relatives.  Here is the full article.


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